Regulators probing banks’ debt collection practices


Federal regulators began peering into the collection practices of JPMorgan Chase in 2012. They are widening an investigation of whether other big banks used erroneous documents and incomplete records to collect on credit card debts. (Frank Franklin II/AP)
May 28, 2013

Federal regulators are widening an investigation into whether the nation’s biggest banks used flawed documents and incomplete records to collect on delinquent credit card debts, according to four people familiar with the probe.

The scope of the inquiry is unclear, but those familiar with it say the Office of the Comptroller of the Currency is expanding a probe that began in 2011 with allegations that JPMorgan Chase was using error-filled documents in lawsuits against debtors.

The regulatory agency is examining the process several banks use to verify consumers’ outstanding debt before taking legal action, according to several people familiar with the matter who were not authorized to speak about an ongoing investigation. An OCC spokesman declined to comment.

The concerns about credit card debt collection echo the wave of shoddy foreclosures after the housing market collapsed. In those cases, as homeowners defaulted on their loans in droves, mortgage servicers were accused of falsifying records and “robo-signing” hundreds of documents without reviewing them.

Similarly, banks have filed hundreds of thousands of lawsuits against delinquent credit card holders in the wake of the financial crisis. As millions of Americans fell behind on payments, the charge-off rate for credit cards soared to $85 billion by the end of 2009, according to the credit card comparison Web site Cardhub.com.

Consumer lawyers began noting a number of collection cases built on shoddy records. Authorities in California, for example, say JPMorgan flooded the courts with lawsuits against credit card holders based on flimsy evidence that cardholders were in default, according to a lawsuit filed this month by the state’s attorney general. The complaint says the bank signed off on hundreds of legal documents “without any knowledge of the facts alleged in the document and without regard to the truth and accuracy of those facts.”

Regulators began examining the debt collection practices of JPMorgan in 2011 after a former bank employee, Linda Almonte, said nearly 23,000 delinquent accounts were riddled with inaccuracies, according to people with knowledge of the probe. Almonte, who sued JPMorgan for wrongful termination, claimed she was fired after warning her supervisors about the records.

Officials at JPMorgan declined to comment on the whistleblower lawsuit or the OCC investigation.

The Almonte case, which was settled out of court, raised concerns among regulators that the same sorts of haphazard practices that plagued the foreclosure process might have crept into debt collection.

The OCC’s investigation reflects the agency’s increasing focus on fair lending and consumer protection coming out of the financial crisis. The agency, for example, teamed with the Consumer Financial Protection Bureau in July to bring a $210 million action against Capital One for deceiving millions of customers into buying costly and unneeded credit card services.

“The OCC’s interest in [consumer protection issues is] a part of that overall focus in Washington,” said Christopher J. Willis, a partner at the law firm Ballard Spahr.

If the OCC finds evidence of abuses in debt collection, it could levy fines and issue an order compelling a bank to amend its practices. Banks could also face enforcement action from the CFPB, which is responsible for enforcing laws to protect consumers from abusive practices.

The bureau took its first debt collection action in October against American Express, which agreed to pay $112.5 million to resolve allegations of abusive collection practices, late-fee charges and deceptive marketing. Customers, in some cases, were misled to believe that if they partially paid off their debts, the remaining balance would be forgiven.

CFPB officials said they are taking a close look at debt collection practices but declined to comment on whether the agency is pursuing any individual companies.

Peter Holland, who runs the Consumer Protection Clinic at the University of Maryland Francis King Carey School of Law, said the problems in debt collection extend from the banks to the companies who purchase delinquent accounts for pennies on the dollar.

Iowa Attorney General Tom Miller, the architect of last year’s $25 billion national mortgage settlement, is leading a multi-state investigation of these so-called debt buyers and overall debt collection practices, according to his office.

Debt buyers often purchase just a spreadsheet with names of delinquent borrowers from banks after accounts become more than 180 days past due, Holland said. Judges, he noted, grew alarmed by the number of cases involving debt buyers that lacked proof of outstanding debt or that contained generic testimony.

Chief Judge Ben C. Clyburn of the District Court of Maryland said he dismissed 3,168 debt collection cases in October because the debt buyer, in part, misstated the amounts owed. The state Court of Appeals adopted new rules in 2011 that required debt buyers to provide more evidence when seeking judgments against consumers based on sworn statements.

“Most of the abuses that we’ve seen have been in the affidavits of the debt buyers,” said W. Thomas Lawrie, assistant attorney general in Maryland’s Department of Labor, Licensing and Regulation. “There are debt buyers signing affidavits without having the consumer’s account files. There’s evidence that some are signing upwards of 400 affidavits a day.”

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